The following is excerpted from the first quarter Portfolio Review report courtesy of Adrian Day Asset Management.
The sentiment towards gold has changed very suddenly, with various indicators of sentiment at multiyear lows. This week's Bloomberg survey of gold traders showed a majority bearish for the first time this year.
To be sure, there are reasons for this change in sentiment. The Euro crisis has moved off the front pages (though it will return). The U.S. economy and with it the dollar has been improving (though the recovery is still weak and uneven). Fed Head Bernanke has dampened talk of QE3 (though also pledged that rates will remain low for years). And India has doubled import taxes on gold – given its position as the world's leading gold consumer, this is significant – though there is pressure to reverse this.
So these bearish factors can change, and certainly easy money around the world will support gold. There is no indication that interest rates are going to move significantly positive any time soon, sufficient to damage gold. If a re-emergence of Europe's woes leads to a strong dollar, that would hurt, but gold and the dollar can move up together and have in the past. If the Euro weakens because of the Euro crisis, that would support gold rather than the opposite.
It's been worse
Moreover, we should put this decline in context. From the early September peak, gold is down 14.5%. There have been five other significant corrections during this bull market, two about the same as this one, one (in 2006) of 21% and the other, in 2008, of 29%, exactly double this correction. There is no reason to think that this correction signals the end of the bull market any more than the other five major corrections did.
The lower price will bring in major buying from one or other Asian central bank wanting to build its gold reserve position, but at lower prices. This reserve buying from central banks lends powerful support to gold and is what has made recent pullbacks shallow and more importantly short-lived.
So we remain positive on gold, and the gold shares, trading at decade valuation lows, may well respond with the leverage over gold they have demonstrated in the past.
In sum, we are looking for the global stock market rally to continue, but want to raise more cash as the risks increase, particularly and more immediately in Europe, later in the U.S. and less so in emerging Asia. We are now fully invested again in gold stocks which we expect to rally strongly in the second quarter following the current correction in gold. While remaining skeptical of the global economy, we remain cautiously optimistic for overall returns for the balance of the year.
Adrian Day is the chairman and CEO of Adrian Day Asset Management.
